c.f. Kirksey v Kirksey – widow moves to step-brothers house; promise did not seek to induce that reliance (moving) so no §90 – no reasonable reliance.

if no (and no reliance) and promise merely a gratuity then not enforceable.

Generally: gift promises not enforced with some exceptions (i.e. promisor dies and enforcement is against estate); desire is to effectuate intent of the parties.

Nominal consideration (i.e. $1 in hand paid…) – can be used to make donative/gift promises enforceable

adequacy of consideration is not evaluated by court; existence (not equality) of bargain is what matters

Reliance and Promissory Estoppel

rationale: expand the bargain-theory of consideration to protect expenditure of parties when no consideration

§90 Promissory Estoppel – promise expected by promisor to induce action, and does induce action/reliance, is binding and enforceable if necessary to avoid injustice. Remedy granted for breach may be limited as justice requires.

Is there actually a promise on which to rely? (See East Providence v Geremia – promise to renew insurance policy)

c.f.implied promise in fact: based on the circumstances/facts of case (See Allegheny College; Wood v Lady-Duff – implied promise to use ‘best efforts’) as opposed to pure legal fiction (implied promise at law).

§86 – promise made in recognition of previous benefit binding to extent necessary to prevent injustice (no requirement of moral obligation) unless §86(2)(a) benefit was conferred as a giftor if promisor would not be unjustly enrichedor §86(2)(b) value of promise is disproportionate to benefit received

Contract Formation – has a contract been formed?

basically K requires offer and acceptance of that offer. parties must somehow indicate their assent to be bound by the K. when this is lacking there will be no K.

§20 – (1) no mutual assent if parties attach materially different meanings unless (2) one party knows or has reason to know of the other meaning – then use that meaning

meeting of minds is sufficient but not necessary to create K under §20

See Raffles v Wichelhaus (Peerless Case) – no meeting of the minds = no K to be enforced.

2-206: offer (i.e. purchaser order) can be accepted by commencement of perf.

§§32 and 62: commencement of performance or nature / structure of K may constitute acceptance, act as an implied promise to perform, and thus create a bilateral K.

Failure to complete perf. would be breach.

See Allegheny College (commencement of perf. implies existence of legal duty) and Wood v Lady-Duff (structure of contract)

rationale: promote efficiency – start performing rather than have added step of formal acceptance. one of promises in bilateral K may be implied promise.

Option Contracts

§25 basic option K – limits promisor’s power to revoke an offer; may be made in same K or in a collateral K. must have separate consideration for the option.

§87(2) - K which offeror reasonably expects to induce reliance by offeree before acceptance and does induce reliance is binding as option K to extent necessary to avoid injustice.

Acceptance of a Unilateral K

acceptance requires complete performance

but §45 – Unilateral Option Contract: treats commencement of perf. as conferring an option K on offeree – right to complete perf. Offer becomes irrevocable on the part of offeror

offeror not bound to perform until complete perf received; only obliged to hold offer open

offeree is not bound to completely perf. – bilateral K not created by §45

if partial performance makes offeree worse off that is too bad - he has no right of action, should have requested a bilateral K.

preparation to perform and commencement of performance is a judgment call.

Mailbox Rule - §63 – default rule that acceptance is effective once out of offeree’s possession, not upon receipt by offeror. but: If offeror explicitly requires receipt of acceptance or a different form of acceptance then this is controlling.

note: K possible if no meeting of minds –decide to revoke but acceptance already mailed

§63(2) does not apply to option Ks

Silence as Acceptance - §69 – only if (1) offeree takes benefit of offer w/ reasonable opportunity to reject and reason to know compensation would be expected OR (2) offeror has indicated acceptance may be manifested by silence and offeree intends to accept OR (3) on basis of previous dealings silence can be considered acceptance.

Valid offer and acceptance constitute a binding agreement – note: discuss whether a bilateral or unilateral K is created

Revocation and Counteroffer

Termination - §36 – offeree’s power of acceptance terminated by (1) rejection or counter-offer (2) lapse of time (3) revocation by offeror (4) death or incapacity of offeror.

Revocation – offeror free to revoke at any time before acceptance by offeree (See Dickinson v Dodds; Petterson v Pattberg)

offers presumed to be revocable unless consideration given to make it irrevocable (option K). consideration distinguishes irrevocable from revocable offers.

Reliance exceptions:

irrevocable offer without consideration allowed when the offeror’s intention is to induce reliance on offer by offeree.

§87(2) used to convert revocable offer into an option K (See Drennan v Star Paving Co. – imply promise by sub to hold offer open due to reliance).

preparation to perform / accept can be sufficient reliance to keep option open.

promissory estoppel basis for establishing option K.

c.f.§90 when used as a tort theory of liability (not K) to allow reliance damages when there is neither formal offer / acceptance or promise

See Hoffman v Red Owl Stores – makes use of equitable estoppel; allow recovery for pre-K expenditures because of the tort-like liability

§90 used as independent grounds for relief without regard to theories of bargain, contract, or consideration.

note: §87(2) has higher requirements for demonstrating reliance than §90 because it creates a legally enforceable, bilateral K

Counteroffer

Mirror Image Rule:

§59: acceptance is effective only if a mirror image of offer and assents to its terms / conditions; otherwise it is a counteroffer if it adds new and/or additional terms.

UCC 2-207: rejects common law mirror image rule and last shot rule.

Last Shot Rule: if forms differ then last form is deemed counteroffer; subsequent shipment and acceptance will be governed by last form (deemed acceptance of counteroffer).

generally: offer remains on the table only as long as it is not revoked or rejected (counteroffer)

Counteroffer treated as rejection of the original offer. Subsequent effort to accept is ineffective.

leave original offer on the table; matter of interpretation whether inquiry or counteroffer.

Battle of the Forms (2-207): don’t strictly apply common law mirror image rule to form Ks

note: Battle of Forms only applies to standardized commercial agreements; handwritten forms or back and forth, face to face negotiation then use traditional offer and acceptance doctrine.

2-207(1): offeree’s form treated as acceptance, not counteroffer even if additional/different terms from purchase order “unless acceptance is expressly made condition to assent to the additional or different terms.”

See Idaho Power – narrow interpretation of “unless” clause - must be very explicit that acceptance is condition on assent to additional/different terms – mere presence of additional terms is insufficient

Disputed terms are either supplied by the offeror or by the UCC (knockout rule)

2-207(2): additional terms are included unless (a) the offeror expressly limits his offer to its own terms (b) the offeror objects to additional terms or (c) the additional terms materially alter the K (and are not assented to)

note: (2) only looks at what terms of K are, not whether or not there is a K. Only get to (2) if there is a K, otherwise we don’t reach it.

therefore materially altering terms don’t by themselves mean there is no K under (1); otherwise you would never reach (2)

additional terms: courts are split as to whether additional terms means additional terms only or also includes different terms. solutions:

majority rule: knockout rule – different terms are knocked out (supported by Comment 6 – but limited because comment 6 only refers to confirming forms)

minority rule: different terms treated like additional terms (supported by Comment 3) OR different terms always drop out (supported by (2) which only refers to additional terms)

2-207(3): If no K under (1) but actions (i.e. delivery and payment) indicate parties believed there was an enforceable K then K consists of terms on which parties do agree

note: (3) only applies if no K under (1) – if there is a K under (1) then look to (2) to determine terms of it.

Knockout Rule:

2-207(2) version: is there actually a knockout rule here? Different terms knocked out?

violence or threat of economic harm constitute duress: standard is whether person making threatening action reasonably believed or should have believed duress would result.

do not enforce opportunistic use of leverage.

modification of an existing K

§ 73: preexisting legal duty rule: performance of an act which the promisee is already bound by contract to complete is not valid consideration for a K modification (See Alaska Packers)

but where there is valid consideration or changed circumstances / good faith dealing parties are free to modify. (see Goebel v Linn – ice crop case. modify K; see Schwartzreich – tailor case. rescind K and enter into new K)

§ 89: modification of K allowed if it is fair and equitable under circumstances not anticipated by parties.

2-209: Modification, Rescission and Waiver: no consideration required; modification must simply be made in ‘good faith’ and for a ‘legitimate commercial reason.’; extortion, coercion, or bad faith will render modification ineffective and void.

market shift may constitute a good faith reason for K modification and, if not assented to by other party, to breach

parties must weigh cost of breach vs. cost of K modification – it may be better for both parties to modify even though it would be best for one party to stick with original K.

generally: look to the motives of the party threatening breach if no modification – are they acting in bad faith / trying to extort or simply responding to circumstances that have rendered K unprofitable?

Misrepresentation and Non-Disclosure

assent implies that both parties have a reasonable understanding of what they are bargaining over – if this is lacking then no K. note: must be as to a material fact.

Courts don’t rule on inadequacy of consideration but overall imbalance may demonstrate unconscionability.

Contacts of Adhesion

Reasonable Expectations Test: §211

policy concerns to consider:

assent: if there real assent if K is long, difficult to understand, no negotiation or bargaining (see Williams v Walker-Thomas). did individual know what he was getting into?

tort-like concerns: don’t want to allow clauses that are unsafe, etc.

structural concerns: if quality cannot be observed (or is not observed) the market may deteriorate (Market for Lemons) – Ks of adhesion present this danger.

Ks of adhesion – typically long, standardized Ks which are difficult to understand and contain an unreasonable or onerous provision. “take it or leave it” Ks.

UCC 2-302 – K between competent adults is binding w/out regard to fairness. If comprehension of meaning of K is lacking the court can use judgment to determine fairness of K terms.

Determining fairness: consider what parties would have agreed to at the time if they fully understood the terms. Is there an element of duress to the term itself?

Generally: including more favorable consumer terms will result in increased price. Is this desirable?

Contract Interpretation – what have the parties promised each other?

§ 201(1) – if parties agree on interpretation of K language then that is what is used, regardless of what seems reasonable to 3P. If parties do not agree on interpretation (even if 3P thinks they do/should) then neither is bound by the understanding of the other (unless one party had reason to know of the other’s interpretation).

if the disagreement of interpretation is material then there is no meeting of minds and no K (Peerless)

generally: emphasize a subjective, party-oriented approach in rules to K interpretation. rely on general good sense

note: subjective understanding of a party must be consistent with an objective meaning of the term

if terms are simply left out courts may supply the missing element (look to trade usage, prior dealings)

The Parole Evidence Rule

When to Use: PER does not apply to subsequent agreements – only applies to prior or contemporaneous agreements (written or oral) that seek to establish legal enforceability of a promise.

§213 – a written agreement that is completely integrated (i.e. final expression under §209) and binding discharges all prior or contemporaneous agreements (oral or written) w/in its scope or inconsistent w/ it.

judge determines whether or not the agreement is integrated and thus whether to allow parol evidence.

admission of parol evidence only if (a) agreement is collateral in form (i.e. capable of expression in a separate agreement; not w/in the scope) and (b) the written K is not fully integrated.

§216 – Consistent Additional Terms: admission of consistent additional terms unless agreement is completely integrated. not completely integrated if consistent additional term was (a) agreed to for separate consideration or (b) would naturally be omitted from the writing

parol evidence cannot modify the K or contradict express terms of the K.

Conditions to a K: PER applies to legal enforceability of a promise, not to a condition to existence of a K.

note: this exception does not apply to conditions subsequent or precedent – those alter the K

if parole evidence is to clear up ambiguity about whether condition is precedent or subsequent, this is more likely to be OK.

UCC 2-202, 2-208; §203 – PER does not exclude evidence of ‘usage of trade’ or prior ‘course of dealing’ which might help explain or supplement the written K (i.e. figuring out which ‘Peerless’ is meant). (this is the Corbin approach)

Requirements / Output Ks: 2-306(1) – when quantity is not specified the requirement is for actual output in good faith, “except that no quantity unreasonably disproportionate to…any normal or otherwise comparable prior output or requirements may be tendered or demanded.”

requirement/output K only when you have exclusivity

Generally: performance of merchant must satisfy standards of good faith and reasonableness.

Certainty and Open Terms

§33 – Certainty – (1) terms of K must be reasonably certain. (2) reasonably certain if terms provide a basis for determining existence of breach and for giving remedy. (3) Open terms may indicate that offer or acceptance was not intended.

UCC 2-204 – K does not fail for indefiniteness if parties have intended to make a K and there is a reasonable basis for remedy.

UCC 2-305 – Open Price Term – (1) K can omit price (use reasonable price at time for delivery) unless parties intended not to be bound unless there was a fixed price (4).

Performance and Breach – have parties kept their promises?

a valid claim of breach may entitle a party to (a) regard performance obligations as discharged (or perhaps suspended) and (b) sue for expectation damages.

objective: social and private interest in preventing collapse of Ks (inefficient). The law thus prefers to have K continue and acts to prevent parties from determining breach has occurred and their perf. obligations are discharged.

Underlying requirement of good faith. (§205 and §1-304)

Conditions

Express Conditions – ConditionsPrecedent vs ConditionsSubsequent

Condition Precedent – must be met in order for any obligations to be imposed on parties. (see Gray v Gardener – whale oil case; must be strict performance before obligation to pay arises)

c.f. Condition to Existence of K – no K until the condition is satisfied; interpretive question. (i.e. identity of ship in Peerless – cotton must arrive on ‘Peerless’ for there to be K)

Condition Subsequent – K in effect but if condition met then remaining obligations are discharged. “discharges a preexisting obligation”

§227 - unclear conditions will be interpreted so as to reduce the risk of forfeiture and minimize reliance losses.

Parole Evidence Rule – does not apply to conditions to existence of a K; does apply to condition subsequent (modifies K by discharging obligation) and may apply to condition precedent (if it is not determining the existence of a K)

parol evidence not barred if it addresses ambiguity of a condition in the written K

Condition, Promise, or Promissory Condition:

Is it a condition? in analyzing whether a clause is a condition (esp. condition precedent) or a promise look to whether it creates risk of forfeiture, how parties intended to allocate risk, language of K, importance of clause to overall K (materiality).

Damages Claims

important to consideration of whether or not there are damages claims (breach) or not.

yes when it is a promise or promissory condition, no when it is merely an express condition.

Consequences of failure

promise: failure of event to occur discharges obligations of the injured party if material breach. Otherwise, other party has opportunity to cure. substantial performance allowed.

§235 – any non-performance of duty constitutes breach; but if breach is not ‘material’ in character the injured party is required to continue with performance but may claim damages for loss sustained.

§§225 237 – material breach results in either suspension (if it is reasonable to suspect the breach will be cured) or discharge of performance obligations. Damages for the former are for partial breach (loss incurred by delay in cure) and total breach for the latter.

Substantial Performance – breach but performance obligation of non-breaching party not excused

Breach must be material in order to serve as basis for forfeiture of the K. If there is substantial performance the injured parties remedy is in damages calculated by diminished value (as opposed to cost of specific performance) (See Jacob & Youngs v Kent)

rationale: want to avoid unfair forfeitures.

note: breaching party can also sue if breach is not material

Whether or not there is specific performance (and thus whether breach is material) depends on what the K specifically requires, whether there is idiosyncratic valuation, what is a reasonable preference, etc.

Consumer preference can be disregarded when (a) cost of satisfying that preference is high and (b) the change in market value of specific performance is insignificant (See Jacobs & Young; Plante v Jacobs)

Sales of Goods and Perfect Tender

2-601 – adopts old common law perfect tender rule with corresponding right of rescission for non-conforming goods.

Rationale: possibility of rescission encourages sellers to conform with Ks.

But 2-602(1) requires buyer to ‘seasonably notify’ seller of intent to rescind and, then, 2-508(1) allows seller to respond with intent to cure defect in tender (if time for perf. has not yet expired).

And 2-608(1) – buyer may revoke acceptance of previously accepted non-conforming goods only if (a) non-conformity substantially impairs the value of goods and (b) he had reason to assume that non-conformity would be cured by seller (but it hasn’t been) or defect could not have been discovered on initial inspection. 2-608(2) – revocation of acceptance must be w/in a reasonable time and before any additional alteration occurs in condition of goods.

2-714 – if non-conforming goods are accepted buyer still has right to sue for conventional K damages.

repudiation of K obligation in advance of time performance is due discharges injured party from his own obligations and allows him to immediately bring a suit for total breach (§253)

UCC – requires cover at the time repudiation is made known; good faith.

Demand for Assurance - §251 and 2-609 provide a promisee who has ‘reasonable grounds’ for believing K will be breached to ‘demand adequate assurance of due performance’ and suspend their own performance until such assurance is received. What constitutes reasonable grounds is determined by facts and good faith.

§152 mutual error in basic assumption material to transaction renders K unenforceable when there is no assumption of risk (Sherwood v Walker; Peerless)

close line between mistake and misjudgment (or even calculated risk);

if that risk is assumed (i.e. that the cow might not be barren is considered in K price) then mistake cannot be used as a defense.

unilateral mistake: also renders K voidable provided the mistaken party was not allocated risk of mistake; exception if the other party did not know or have reason to know of the mistake and has relied on it.

exs: include clerical or mathematical error (See Elsniore Union); does not apply to mistake in judgment

If non-mistaken party realizes the mistake and relies on it anyway, courts generally allow reformation of K by mistaken party. rationale: similar to last clear chance rule – party w/ last chance to avoid harm has obligation to do so. create incentive to avoid harm.

lack of complete information does not necessarily invoke the mistake doctrine; if better-informed party has made expenditures to acquire information then they are entitled not to disclose it. rationale: want to encourage / reward information gathering.

Similarity to Hadley:

only hold parties responsible for what they contemplate

i.e. foreseeable expectation damages (Hadley); conditions / states of the world for which risk has been explicitly allocated (mistake)

generally: want loss resulting from mistake to lie w/ mistaken party if possible.

Impossibility and Frustration

General Elements Required:

unexpected occurrence not covered by the K

failure to have allocated risk of that occurrence by agreement or custom

commercial impracticability with respect to performance or decrease in value of obligations

Impossibility:

Implied Condition Precedent: courts willing to imply condition precedent if a certain thing or state of the world is necessary in order to carry out K and there has been no allocation of risk (See Taylor v Caldwell, Krell v Henry) – voids the K.

generally: look to intent of parties – what would they have intended ex ante if they had contemplated the event. parties usually do not intend to provide insurance for the other party in case of unforeseen event but look to which party is in better position to insure against the event.

Impracticability

needs to be a substantial increase over initial cost of performance – (i.e. 15% in American Trading – Suez Canal not enough) mere added expense is not sufficient to satisfy ‘commercial impracticability’

Frustration of Purpose

similar to impossibility, if supervening events frustrate the K or substantially decrease its value then K is unenforceable (Krell v Henry)

consider: is the K really frustrated or was the event unlikely but not unimagined and, thus, the risk of its occurring allocated (See American Trading – Suez Canal); if risk allocation is not specific consider which party is in the better position to insure.

Intended Performance?

to determine if it is impracticability or frustration, determine what the promised performance is.

just because particular means of performance intended is frustrated / impossible does not mean that it was the only possible performance (i.e. if there were other music halls in Taylor, alternative route in American Trading)

Policy Considerations

Fault – could the problem have been prevented (i.e. had warning of canal closing)

Insurance – was one party in a better position to ensure against this event (i.e. do lots of shipping; insure against wars / canal closings / etc.)

generally: courts seem to take Ks and cease to enforce them at the time the unforeseen event occurs; let losses lie where they are (Kull excerpt)

Mistake vs. Impossibility vs Frustration

Assumption pre or post K formation

Mistake – concerns basic assumptions that are made and are false at time of K formation

§359 and 2-716 – desire to liberalize granting of equitable relief; expand classes in which monetary damages are considered inadequate. Use equitable relief (i.e. injunction) if it best serves justice.

See Walgreen Co. v Sara Creek – issue injunction and let parties decide what the value is to remove it; works well when damages are (a) difficult to calculate and (b) equitable relief is easy / inexpensive to enforce. supported by Coase Theorem.

The Lost-Volume Seller Exception – 2-708(2) and §350 – if seller is able to expand inventory / output to sell to as many buyers available then standard damage measure (involving mitigation) is inadequate. Use lost profit + overhead from actual K.

Foreseeability – implicit duty to premitigate

breaching party is liable only for damages which arise naturally or were reasonably contemplated by parties at time of K formation (See Hadley v Baxendale – take pre-breach efficient precautions to minimize loss resulting from breach)

Disproportionality: codified in §351 – don’t allow recovery of lost profits when it is disproportionate to the K price

effect: under-compensatory measure of damages – don’t always include lost profits if they are not foreseeable.

rationale: want to limit breaching parties liability to what they could reasonably foresee and insure against; don’t want to give injured party an incentive to withhold info, keep K price down, and receive free insurance policy. encourage promisee to be efficient, cost-saving, before breach occurs.

Certainty

§352 - damages for breach recoverable only to the extent that they can be determined w/ reasonable certainty

otherwise will need to consider reliance and restitution measures of damages

generally factored into damages calculations anyway – breaching party gets credit for the value of the goods / services actually supplied; must pay the difference in cover.

quantum meruit – injured party still bound to pay for “reasonable worth” of services received (See Britton v Turner); can counterclaim for damages sustained (if any)

generally: breach does not validate unjust enrichment (but it does void K) so breaching party still compensated (but must sue in reliance).

but note: quasi-K claim here still governed by original K. value of services to non-breacher may be less then under K (but they may not be more) when breacher sues in restitution.

but note: in some jurisdictions if there is a willful breach of K courts may not allow breacher to bring restitution action.

burden of proof: breaching party bears burden of proof for showing unjust enrichment.

Losing contracts – good reason to consider restitution; breach is fortuitous and ‘injured’ party doesn’t want to enforce the K

Rule #1: Restitution

§373 – support recovery of entire value of work up to date of breach, even if it exceeds K price provided that non-breaching party has not fully performed. Material breach so K no longer acts as limit on damages.

§356(1) – allows for liquidated damages provided they do not exceed what is “reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss” at time of K formation.

create a new damages ‘rule’ but excessive liquidated damages (not a reasonable ex ante proxy) are deemed a penalty and are unenforceable – then use traditional damage calculation rules

See Lake River v Carborundum – steel powder bagging – liquidated damages did not reflect cost avoided due to breach; thus constituted a penalty. But was this ‘penalty’ factored into K price?

Intended Beneficiaries – any person intended to be benefited by the K (even if not specifically named) can enforce against the promisor.

§304 – distinguishes between intended and incidental K beneficiaries

who is an intended beneficiary is done on a case-by-case basis; what did contracting parties intend / contemplate.

Defenses – promisor can assert any defenses against 3P beneficiary that could have been asserted against promisee. Can’t raise defenses that have already been settled or waived as to promisee.

Post-contractual modification or discharge – contracting parties generally retain control to discharge rights of 3P beneficiary but there are limitations (i.e. reliance or if the 3P directly participated in the initial bargaining)

at some point (either at suit or perhaps earlier) the 3P’s rights vest and cannot be removed.

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c.f. redistribution of wealth / value – rather than giving widget to highest value user what about giving it to the one who needs it the most? contract law doesn’t actually do this – isn’t economically efficient.

c.f. some areas of law where efficiency is definitely against public policy for other reasons. not all Ks are commercial.

Standards allow for justice and flexibility: law should not be mechanical.

Consideration and Bargain

Consequences of §90 PE

Fears: Grant Gilmore – the Death of Contract (K law going to be subsumed by tort) suggesting PE will displace traditional K doctrines (consideration, bargain theory, expectation measure of damages).

tort-like notion – enforce agreements between parties whether they like it or not; hold person who made the promise that resulted in reliance responsible.

see Hoffman; Drennan

Reality: This is not happening – traditional bargained-for consideration is still basis of K law and damages based on §90 tort-like liability are rare and get reversed often. (Hillman)

Inadequacy of Consideration: courts don’t get involved in evaluating whether or not a bargain / consideration is fair or a good one to make. rationale: support freedom of K. c.f.want of consideration – if no consideration at all then promise not enforceable.

Contract Formation

Unfairness and Unconscionability

Contracts of Adhesion

Monopoly Power:

businesses w/ market power / monopoly should not be considered to create unconscionable Ks – give consumers the terms they want at the price they want. (Schwartz)

rationale: not enforcing adhesion Ks requires consumers to pay more for better terms which they may not want. goes against freedom of K. otherwise we take a paternalistic approach – consumers don’t know what they really want or is in their best interests.

Market for Lemons Description

competitive market may not satisfy consumer desires; gradual decrease in quality of goods available when consumers cannot observe quality.

end up with low-quality goods; consumers not overpaying but no high-quality goods on the market

overall social welfare loss – race to the bottom in terms of quality. no market for consumers who want to pay more for higher quality.

Solutions to Market for Lemons:

Government Intervention:

Rakoff – freedom of K should not apply to Ks of adhesion – these actually threaten freedom to enter into Ks because right goods / K terms aren’t being offered.

gov’t (judiciary or legislature) should step in and provide quality terms – this will help prevent an efficient market with a “competitive pathology”

critique: efficiency and information problems – how is going to identify the situation and determine maximal consumer preferences?

Market Mechanisms:

reputation – build a reputation for high quality; incentive to provide high quality to maintain that reputation.

advertising – may be able to overcome or mitigate information asymmetry in the marketplace by advertising your high quality of goods.

warranties – convince buyer of high quality by backing up sale with a warranty.

Non-Disclosure

Disclosure of Public v Private Information (Kronman):

public information: casually acquired information/fact obtained by a party without any cost must be disclosed.

rationale: didn’t invest anything – so no need to provide return on investment

non-public information: deliberately acquired information (if time/energy/money is invested in obtaining) has no requirement of disclosure.

ex: doctrine of mistake – let party off the hook for unanticipated events; reduce transaction costs

efficiency + autonomy: if parties know what default rules are and are able to contract around them then we can set default rules to promote efficiency w/out impinging on autonomy. critique: not a reasonable assumption.

Schwartz– ‘The Case for Specific Performance’ – courts often award under-compensatory damages; award specific perf to protect interests and because non-breaching party has better information than court about how much damage is sustained.

but: may create an incentive for parties to seek specific performance (supra-compensatory damages) even when court could provide compensatory damages

loss of efficiency: breakdown in bargaining could lead to inefficient result

Reliance: not inconsistent with freedom of K; designed to effectuate intent of parties.

Liquidated Damages: striking down liquidated damages clauses as penalties under §356(1) is paternalistic; goes against freedom of K – especially in commercial settings where clause is figured into K price.

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